Tax reform may be coming after election
The outcome of Tuesday’s election could be profound tax changes, but that’s only if one party wins control of both houses of Congress and the White House.
“After the November election the Democrats and the Republicans are going to know how many seats they hold in the House and the Senate,” said Tim Speiss, co-leader of Top 100 Firm EisnerAmper's Personal Wealth Group. “One of the parties will be the majority. Let’s say it’s the Republicans. The Republicans would rather act in early 2021 on tax reform because they know who their members are. They know where they stand in terms of having a majority or not. It could make sense, and this goes to the fact that in the first year of a presidential term, tax reform is usually undertaken because the Democrats and the Republicans will know what their voting bloc looks like. And, by the way, this goes to the committees, too, like House Ways and Means. Either party might want to act proactively well ahead of 2025. That’s something worthwhile to note.”
That’s because most of the individual tax provisions of the Tax Cuts and Jobs Act of 2017 are set to expire in 2025. While the corporate tax changes in the 2017 tax law were made “permanent,” or as permanent as anything is in Washington, that wasn’t the case for the majority of individual tax breaks. Some of those provisions could be made to expire earlier under a Biden administration.
At PricewaterhouseCoopers, the Big Four firm has been doing scenario planning with its clients using an app called Beacon to help them assess what their taxes would look like under Democratic presidential candidate joe Biden or a second Trump administration (see story).
“When we talk to the clients, it’s a mixed picture,” said Kathryn Kaminsky, who was recently appointed vice chair and U.S. and Mexico tax leader. “A lot of them do their own scenario planning and they work with us on it. One of the things that we’re really focused on is the new normal. You have to plan for uncertainty. We are seeing people looking at the different options and seeing what kind of planning they can do. If you think about today’s tax rate, is it possible it will ever go lower than that? I think the answer is probably no, so what kind of planning can they do around the same tax rate and planning going forward, based on the two different scenarios on what we know about the Biden tax plan and under the current administration.”
Biden has proposed increasing the top individual tax rate to 39.6 percent for taxpayers with income over $400,000 in advance of the scheduled expiration of this rate at the end of 2025.
“The top rate would default to 39.6 percent again for income over $400,000,” said Speiss. “It’s possible that could come into play before the end of 2025. The tax legislation was signed into law in 2017 and was effective for years 2018 to 2025. It’s going to default anyway. The individual tax provisions all default at year-end 2025. This would be going for an extension.”
Biden has also proposed taxing capital gains and qualified dividends for individuals with over $1 million in income at ordinary income rates. “As far as the capital gains tax itself, that could be very well subject to an indexing provision,” said Speiss. “Capital gains and qualified dividends would be subject to ordinary rates, not the preferred rates, when an individual has more than $1 million in income. On the other hand, Candidate Biden has a mark-to-market regime he has proposed for wealthy taxpayers. Then the big one is reducing the estate tax exemption. Right now it's well ahead of $10 million, and that expires in 2025. He wants to reduce the exemption back to $5 million, the way it was before the Tax Cuts and Jobs Act.”
Trump, on the other hand, has called for reducing the capital gains tax rate from 20 percent to 15 percent, as well as indexing capital gains to inflation. He has also called for “middle-class tax cuts” in the form of rate reductions, although many of the benefits of a rate reduction would likely benefit top earners the most.
Trump has already signed an executive order allowing the deferral of Social Security payroll taxes that are taken out of each worker's paycheck. The 6.2 percent tax can be suspended from Sept. 1 until the end of the year for employees who earn less than $4,000 for any biweekly pay period. The payroll tax break runs through the end of 2020. If Trump is re-elected, he has called for completely forgiving the deferred payroll taxes.
“The 6.2 percent tax was suspended effective Sept. 1 until the end of the year,” said Speiss. “That’s already in play. But this is just a deferral, it’s not an elimination. It’s a deferral on having to pay the 6.2 percent from Sept. 1, 2020, to Dec. 31, 2020. He’s said that if he’s re-elected, he’s going to make this permanent and will completely forgive the payroll taxes. You won’t have to pay them.”
Biden also has a raft of proposals for various individual tax breaks. “There’s another approximately 20 provisions that Candidate Biden has in the stimulus area on tax credits, retirement savings and income exclusions, everything from 401(k) plans to benefiting people with disabilities and disability-related expenditures,” said Speiss. “Domestic violence would be defined as a qualifying condition for a hardship withdrawal from a qualified plan, for example.”
On the business side, Biden has called for phasing out the Section 199A “pass-through business deduction” at incomes over $400,000. Other proposals involve reclassifying gig economy workers as employees, rather than independent contractors. Some involve international taxation while others relate to renewable energy incentives. In addition to EisnerAmper, Top 10 Firm Crowe has also been keeping a scorecard of the various proposals (see story).
“On the business side there are 35 provisions we’ve been following,” said Speiss of EisnerAmper. “On the business side, the GILTI, the Global Intangible Low-Taxed Income, would be increased from 10.5 percent to 21 percent, for example. Some of these provisions are not tax-related per se. They’re more like policy. There would be expanded tax credits to help businesses upgrade and invest in low-carbon technology. There’s one tax credit for that. Restoring the full credit for electric vehicles, tax credits for homeowners for residential energy efficiency — that expired, but would be reinstated — solar investment credits, make permanent the New Markets Tax Credit. There’s a lot of focus around energy, increasing the corporate tax rate. There would be a new corporate minimum tax, considering global book income, not just U.S. income. So if you’re a company doing business around the world, you would have to calculate the corporate minimum tax on global book income. That would be a 15 percent tax rate. To be determined is how it’s calculated.”
PwC’s survey also indicates concern about international taxes at companies. “Executives really do believe that under both scenarios that tax policy is the No. 1 policy risk, and it’s really domestic policy,” said Kaminsky. “But when you contrast that with tax leaders, there is a big focus on international.”